Bailment, Mortgage, Lien, Pledge- Indian Contract Act

Bailment vs. Pledge

Bailment and Pledge are two types of contracts that can get confusing. Bailment is defined as per Section 148, Indian Contract Act 1872 as the transfer of movable goods from one party to another party for any specific purposes such as service, promise or need[1] whereas, pledge is defined in Section 172 as the transfer of movable goods/property to the lender (banks or financial institutions) or person as security to acquire a loan/debt or performance of contract or promise.[2] It should be noted that pledge is a special kind of bailment and hence every pledge is a bailment, but every bailment is not pledge.

To understand these two concepts better we can use the help of examples. If Mr. Sharma were to give his clothes to the dry cleaners to have them deep cleaned this transfer of good would be known as bailment. Whereas, if Mr. Sharma went to the bank to get a gold loan, the transfer of his gold in exchange of a loan would be known as pledge.

The specific differences between them are as follows:
1. Their purpose– The purpose of bailment is to service, safekeep or repair. It is carried out for either a profit or non-profit reason. The purpose of pledge is securing a loan, or performance of a promise. It is done with a profit-motive.

2. Right to use– The bailee can use the movable asset reasonably or for the specific purpose exactly as they are authorized to do so. On the other hand, the pawnee is prohibited from using the goods for any purpose. They have the right to only hold onto the goods until the debt is paid off.

3. Right to sell– The bailee is entrusted with the products for a specified reason, therefore the bailee has no right to sell the goods but is obligated to return it after the purpose has been fulfilled. If the bailed goods are sold, it would amount to conversion. Whereas the pawnee has the right to sell the pledged goods to recover the outstanding debt in case of default, after giving the pawnor reasonable notice of the sale.

4. Consideration– Consideration may or may not be involved in the bailment contract. It depends on the conditions of the contract. Even when no consideration is involved, the contract of Bailment is valid.   However, since the entire notion of a pledge is to serve as a security for an obligation, the presence of consideration is necessary. Without a consideration, the contract of pledge will not exist.

5. Reimbursement claims– In the case of non-gratuitous bailment, the bailee has the right to recover all the expenses incurred from the bailment. The bailee has the right to recover all extraordinary expenditures incurred for gratuitous bailment. For pledge, the pawnor has the duty to pay for any extraordinary expenditure incurred by the pawnee in the preservation of the goods.

6. Responsibility– According to section 152, the bailee cannot be held responsible for the loss, destruction or deterioration of the thing bailed, if he takes due care, acts as a prudent man, makes authorized use of the property, and does not mix the bailor’s property with his own. If the pledged goods have been lost or damaged due to the fault or negligence of the pawnee, he/she will be held liable, and may lose his/she claim against the pawnor to that extent.

Pledge vs Mortgage

It is very important to understand that both pledge and mortgage are used to create a charge over properties or goods of the borrower as collateral against the loan provided. But there are some important differences between the two, and both cannot be used as a replacement for each other.

Mortgage can be defined in Transfer of Property Act, 1882 under section 58 as “A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being arc called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.”[3]

  1. Nature – In case of pledge, it always takes place on movable property for example, gold, shares, NSC, FD, Insurance policy, etc. And being opposite in nature mortgage only takes place for immovable properties like house, building, land, machinery, plant, etc.
  • Right to Use – Being one of the main differences and as mentioned before also, under pledge the pawnee cannot use the goods kept with him in pledge but a different case scenario in mortgage the mortgagee has the right to use the property which is mortgaged to him.
  • Written Contract – Under pledge it is not necessary for the contract to be in written form. But for mortgage it is necessary to have a written contract. Also, it is necessary to testify it by two witnesses and register it.
  • Right to Sell – In pledge the lender or pawnee can sell the goods pledged by the borrower or pawnor if the borrower is unable to pay the debt. Hence, in order to recover the amount of debt lender can sell the asset in pledge. In case of mortgage, the mortgagee will have to file a suit in the court to get possession of the property and sell it to recover the debt amount.
  • Possession – In pledge the possession remains with the lender or pawnee and as we know in mortgage the lender has right over goods mortgaged but the possession is with the borrower only.

Pledge vs Lien

As mentioned above, pledge has already been defined and explained. Lien is the right to retain goods or securities belonging to a debtor until dues are paid fully to the retainer. Liens and pledges are quite similar in that they are both security interest options that are used for the same purpose; that is to ensure that funds are repaid, obligations are met, and services are performed. An example to understand lien would be that of mortgage. One’s property is used as security for the repayment of the loan from the bank.

The differences between the two are as follows:

1. Creation/ Legality– There is an involvement of law in lien while that is not the case of a pledge. A lien can be formed by agreement between the two parties or can be imposed by law. A pledge, on the other hand, can only be created by contract. This is a major difference between lien and pledge.

2. Object – As mentioned earlier the main objective of pledge is to provide security for the performance of any promise or security for the payment of a loan. On the other hand, in lien the holder possesses all the goods and properties until all his claims are satisfied. Therefore, the objective is to retain goods until the claims of the holder are satisfied.

3. Possession – In lien when the possession of the property is lost, the lien is released. Thus, it is just a possessory form of security interest. Whereas, in pledge the pawnee has the right to be compensated for all the expenses incurred by him during possession.

4. Right of Sale- A lien is the right to detain the assets/property, but the lender has no right to sell the assets unless stated in the contract. As for a pledge, the pawnee retains title to the asset until the obligation is met and in the event of default, the pawnee has the right to sell the assets and recover losses. Furthermore, pledges are made on assets that can be physically delivered, whereas liens can be on property or assets.

5. Termination-The lien terminates as soon as the holder releases the goods under his retention. Termination is only on the payment of a loan or the performance of a promise Even if the pawnee returns the goods before the payment of a debt, his right does not terminate.

[1] The Indian Contract Act, 1872, § section 148, India.

[2] The Indian Contract Act, 1872, § section 172, India

[3] The Transfer of Property Act, 1882, § section 58, India

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